"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Tuesday, December 4, 2012

The Volatility Index or VIX, is a useful index for measuring investor/trader sentiment in regards to the broader stock market's health. It reflects option premiums and is therefore a decent way of peering into the thinking of those who write the things and what they are expecting/fearing in the immediate future. As with any market index, it has its shortcomings but all in all, it is remains a good gauge of sentiment.

While the following chart is not scientific it is helpful in understanding the impact of the Federal Reserve's monetary strategies over the past few years. I prefer to look at this chart as a demonstration of official monetary sector meddling into the affairs of capitalism/free markets.

In simple terms, the lower the index moves, the less fear or concern option writers and thus investors in general have towards the health of the US stock markets. When the index is rising, it reflects unease/discomfort/fear in those degrees.

Note how sharp spikes upward have been accompanied by expectations of the ending of previously announced and implemented rounds of Quantitative Easing. You can see the first of these spikes back in April 2010 when QE1 was coming to an end. It was not long after that the Fed announced the next round of QE, this one involving outright purchases of Treasury bonds. That was good for another outbreak of "DON'T WORRY- BE HAPPYitis" among the Wall Street crowd.

Of course, once that virus ran its course and QE2 expired in the summer of 2011, back came the awful realities of the gargantuan mountain of indebtedness overhanging the US economy. Even with those artificially induced lower long term interest rates, those stubborn consumers were not spending fast enough to offset the proliferation of bad debts, foreclosures and delinquencies. Throw on top of that massive problems in the Eurozone and investors actually seemed to awaken from their drunken stupor of indifference long enough to begin worrying.

"Tsk, Tsk' said the Central planners and out came the European Stability Mechanism in conjunction with the Fed's "Operation Twist" (the sale of maturing shorter dated debt in exchange for the equivalent amount of longer dated debt) and PRESTO! - ALL WORRIES GONE. "I CAN SEE CLEARLY NOW, THE RAIN IS GONE. I CAN SEE ALL OBSTACLES IN MY WAY.... IT'S GONNA BE A BRIGHT, BRIGHT, BRIGHT SUNSHINY DAY".

Down falls the fear level among investors as the injection of drugs courses through their veins. Greece however flared up again, as did Portugal, as did Spain and others in the Euro Zone and that produced a fleeting burst of anxiety/concern among investors early this year. With the ECB and the Eurozone ministers working feverishly to calm worried markets, it did not take long before all was well once again.

Now, as we have entered the final quarter of this year, the Fed has announced another round of QE (QE3), this time consisting of the purchase of $40 billion per month of Mortgage Backed Securities. It is odd, considering the reaction of the market to past pronouncements from the Fed, that the VIX actually spiked a bit higher instead of sinking even further on the news.

The index did move lower however in October when proof of the actual buys under this latest round of QE were evident. However, it should be noted that the index is beginning to rise again.

This is rather noteworthy to me as a trader/chartist. If this was a commodity, I would be looking to buy it based on the chart pattern. It has failed to make new lows and instead has a mini uptrend occurring since August of this year. Could it be that the Fed's QE's are beginning to lose their luster on the markets? Are the amounts considered to be insufficient by the broader market? Or is it perhaps the current "fiscal cliff" talks which are overwhelming trader sentiment in general? Either way, something has this market a bit nervous when compared to the recent degreeof complacency that we have witnessed in response to recent Fed announcements.

This leads me to believe, based on the analysis by Goldman last week and the comments from some current Federal Reserve governors, that another round of QE (QE4) is forthcoming. The Fed is simply not getting enough bang for their buck from QE round 3.

There are a couple of other factors at work here also. Many in the investment class are worried about tax hikes coming next year. Combine that with concerns about taxes on dividends nearly tripling and a spike in capital gains taxes and some investors are cashing out now before the Obama regime's grab of more money commences. Throw in further uncertainty about the impact of Obamacare on business and further regulatory burdens, and a growing number of investors are cashing in before 2012 ends. Clearly nervousness is rising meaning that the Fed is not only now fighting the deflationary forces arising from excessive debt levels but it is also fighting the results from the recent election.

At this point, based on the charts, it looks to me like some market participants are bracing for another fall back into recession in the US. Look at the chart of the Ten Year Treasury Note Yield. It is basically flatlining.

Today's breach of both psychological as well as technical chart support centered near the $1700 level has set the bulls on their heels while raising the spirits of the gold bears.

The market has not been able to get its feet solidly underneath it since that beating it took last Wednesday. When the overnight seller/sellers of large size managed to shove it down below the low of that last Wednesday, they found the stops that they were hoping to find and then some.

The market is now moving purely on technical momentum as there is really not a lot in the way of fundamental developments. The Dollar is actually lower today while at the same time reports indicate strong buying of gold in Asian markets. Don't forget also the surge in gold bullion coins as the public begins to finally show some signs of nervousness/unease with the general state of the US financial picture.

A large portion of this move lower is being blamed on the break down in the so-called "negotiations" over what has been dubbed the 'fiscal cliff'. I say so-called because one side shows no concern whatsoever for the enormity of the sums of indebtedness that they are heaping onto this nation's back. Be that as it may, there is about as much possibility of anything that would actually SERIOUSLY impact the long term fiscal deterioration of this country coming out of this group of politicians as there is of a snowball emerging unscathed from a journey into hell. They will continue spending us all to hell.

The fact is that the US is technically bankrupt, if one wants to use the actual definition of the word, and will be forced to borrow increasing amounts of money with which to fund its profligate manners. The Federal Reserve will buy a huge chunk of those IOU's in their mad attempt to continue pushing down longer term interest rates thereby further distorting the market signals and just compounding the damage that will be inflicted when it comes time to pay the piper.

QE4 is coming your way this month to be followed in the future by QE5, QE6 and then QE to infinity as my good friend Jim Sinclair has rightly dubbed it.

I am not sure what the trigger event will be but at some point, the VELOCITY OF MONEY, will begin to pick up. When that occurs, the Dollar will drop into the abyss and all of us will pay the price for this exercise in idiocy by the Fed as we watch our way of life descend with it. I dread the coming day when a shopper will head into the grocery store and come out with a single box of Corn Flakes costing $10.00.

Back to the Chart - Gold is trying to hold at the 100 day moving average level which is a key technical support point especially for the hedge fund computer algorithms. If this level cannot inspire an immediate bounce higher, one that takes the price back above $1720, we are going to head to $1680 to see if that will stop the bleeding. That is a big chart level of support with a significant amount of sell stops sitting below it so believe you me, some of these gold bears are salivating at the prospect of getting to those. The big question is whether or not the Asian buyers put an end to this downdraft or are willing to wait for prices to fall even further before they step in and end the bear's party.

If for some reason this market were to get to $1680 and break down, the next level of support does not surface until near $1640. One suspects that Asian Central Banks and other Central Banks around the globe are getting their order desks ready.

Ever since Wednesday of last week, gold bulls have been on edge. An unusually large surge of sell orders on that day broke the price of the metal sharply lower making a large number of recently purchased put options extremely profitable while simultaneously inflicting some serious chart damage to the metal.

Friday of last week saw another barrage of selling with the market attracting some bargain buying in yesterday's session (monday).

Once again it seems as if the mysterious whack-a-mole bandit has struck the metal. This time it was in the middle of the night here in the US, a few minutes before midnight in the Central time zone. Volume surged to levels not normally seen except during the busy pit session trading hours.

Take a look at the following price chart where you can clearly see the SHARP SURGE in volume in the middle of the night. Notice how that volume spike compares to the height of the volume bars during the pit session hours. That is what makes it stand out so obviously.

It is evident that selling of this nature was designed not to obtain the highest possible selling price for a rather large amount of metal to sell. That would have been done by a measured selling program of scale up selling into both short covering and some fresh buying, as that which occurred on Monday. NO, selling of this magnitude is done with one purpose and one purpose only - to take down a market.

Some of the usual skeptics will no doubt instantly dismiss such talk of manipulated price again. Attempting to convince such is a fruitless endeavor. Someone could piss down their backs and they would still believe it is raining. Truth be told it matters not whom the culprit/culprits are; their footprints are unmistakeable.

Gold will need buying on the physical markets to absorb the speculative long liquidation and fresh shorting that is now occuring as a result of this technical breakdown of the paper markets. That means Asian buying and Central Bank buying.

If you have benefitted from some of the articles posted here and would like to express your gratitude to Trader Dan for freely sharing some of the market wisdom he has gained over his long trading career, please feel free to Donate.

About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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